Tokyo Office Rents Hit New Low--A Boon for Business

Walking around Tokyo’s central business districts at different times over the past two decades, the question that always occupied my mind was: Is Japan’s economy growing enough to support all this new commercial office space? The mystery was the greatest regarding the Marunouchi and Ohtemachi sections (in the Chiyoda ward) between the Imperial Palace and Tokyo railway station, where a host of gleaming new high-rises slowly but inexorably replaced older buildings.

I say slowly, because another wonder of the Japanese construction—especially of commercial buildings—seemed to be how many years it took to complete the (admittedly excellent and high quality) project. I was usually visiting from China, where whole cities of high-rises could be—and were—rebuilt (admittedly at a quality standard far below that in Japan) in half a decade, so the contrast was stark.

The inexorable part seemed to be the result of the BOJ’s zero interest rate policy and QE—now aptly called and recognized to be “financial repression”—that essentially relieved sponsors and financiers (i.e., banks) of the burden of financing costs, so that abundant money flowed to big construction projects which—in Japan as elsewhere—create robust opportunities for graft and patronage as well as for collusive bidding and profiteering by contractors, and hence always enjoy government support.

It is no different today. Take a walk around any of Tokyo’s five central business and commercial wards (“ku”) (Chiyoda, Chuo, Minato, Shinjuku, and Shibuya) and look at many large and small commercial buildings at various stages of construction. As usual, some of the biggest projects are just north of Tokyo station.

Now consider the graphic above. It comes from an article on the commercial real estate market in the December 9thNihon Keizai Shimbun that cites a November survey of above-mentioned five main business wards conducted the by the large office space and relocation consulting firm, Miki Shoji. The graph presents findings of a two consecutive month increase in office vacancy rates--up 0.12 points to 8.9 percent—to the highest level since April. The survey further reported the 39th consecutive monthly decline in office rents to the lowest level since the bursting of the bubble in the early 1990s.

Vacancy rates cited were: Minato-ku 9.82 percent, Chiyoda-ku 8.06 percent, and Shinjuku-ku 9.38 percent. The average vacancy for new buildings was 22.32 percent, up 1.97 points in November. The survey notes a great disparity between projects that had secured a major anchor tenant, and had fewer vacancies, and those that had failed to find an anchor that had many vacancies.

Miki Shoji noted that a number of large buildings would come on the market in Nishi Shinjuku and Marunouchi in the next few months. This will surely further increase overall vacancy rates and depress rents. In the five wards, over 50 percent of buildings have some vacancies.

All this is good news for renters. According to Miki Shoji, the per square foot monthly rental offer (excluding common areas) is now JPY 477.57 (JPY 16,973 per tsubo).

But for landlords and developers, the situation has long been dire, and especially since the 2008 “Lehman shock.” Another survey for November, by Sanko Estate found that the rental price decline had reached 48 percent in Shinjuku-ku from a peak in January 2008, to JPY 16,356 per 3.3 square meters (one tsubo), and 45 percent in Shibuya. Other declines were Chiyoda-ku 31 percent, Minato-ku 31, and Chuo-ku 27 percent.

Along it being a boon to renters, we can hope that what is happening in Japan’s office rental market will help to boost its long-term competitiveness, particularly in service industries. There is, in fact, “good” deflation, and this is an example.

On the other hand, such deflation—the result of over-building—cannot have been the objective of developers, commercial bankers, or the BOJ. It is, rather, an ironic unintended consequence of the “stimulative” monetary policies that Japan has pursued, largely to prevent deflation. Let us hope that the good effects will last longer than the bad.